JUST before the Fourth of July weekend, Paul A. Volcker packed his fishing gear and set off for his annual outing to the Canadian wilds to cast for Atlantic salmon.

He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression. A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus.

“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.”

As the financial overhaul took final shape recently, he worked the phone from his Manhattan office and made periodic visits to Washington, trying to persuade members of Congress to make the legislation more far-reaching. “Constructive advice,” he calls it, emphasizing that he never engaged in lobbying.

For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.

Like few other policy giants of his generation, Mr. Volcker has been a pivotal figure in the regulatory universe for decades, and as he looks back at his long, storied career he confesses to some regrets, in particular for failing to speak out more forcefully about the dangers of a seismic wave of financial deregulation that began in the 1970s and reached full force in the late 1990s.

Despite his recent efforts to ensure that the financial legislation might correct what he regards as some of the mistakes of the deregulatory years, he’s concerned that it still gives banks too much wiggle room to repeat the behavior that threw the nation into crisis in the first place.

Some analysts share Mr. Volcker’s worries that the proposed changes may ultimately not be enough.

“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation. “But I kind of worry that is not going to happen.”

Hear, hear, says Mr. Volcker.

“People are nervous about the long-term outlook, and they should be,” he says.

AMONG the tools that Mr. Volcker has been able to deploy when regulatory debates heat up is the public support he enjoys in financial and political circles.

He earned that esteem over many years, and is famously credited for making tough-minded choices to tame runaway inflation as Fed chairman from 1979 to 1987, when he served under Presidents Jimmy Carter and Ronald Reagan.

At the age of 82, Mr. Volcker is from a generation of Wall Street personalities who accepted strict financial regulation as a fact of life through much of their careers. In his recent push for more stringent financial regulations than he believed Congress — and the Obama administration, for that matter — were inclined to approve, he lined up public support for a tougher crackdown from other well-known financiers who are roughly his age, including George Soros, Nicholas F. Brady, William H. Donaldson and John C. Bogle.

His most visible contribution to the current regulatory overhaul effort is what has come to be known as the Volcker rule, which in its initial form would have banned commercial banks from engaging in what Wall Street calls proprietary trading — that is, risking their own funds to speculate on potentially volatile products like mortgage-backed securities and credit-default swaps.

Such bets added considerable tinder to the financial conflagration that erupted in 2008. Many went horribly awry, and the federal government used taxpayer money to bail out banks, Wall Street firms and even a major insurer.

“I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had,” says Mr. Volcker, explaining why he first proposed the rule 18 months ago.

Congressional handicappers and Wall Street originally gave the Volcker rule a slim chance of becoming part of the overhaul bill — until, in fact, it got solidly on track to do just that.

Mr. Volcker thinks that Congress has watered down his trading rule — more on that later — but rather than roar in protest, he has resigned himself to the present shape of the Volcker rule as well as the overall legislation.

“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”

The 2,400-page financial overhaul legislation, already passed by the House, is coming up for a vote in the Senate this week.

The Obama administration says it is now satisfied with the broader legislation, and in particular with the Volcker rule in its amended form.

“The Volcker rule was designed to make sure that banks could not engage in proprietary trading or create risks to the system through their investments in hedge funds or private equity,” says Neal S. Wolin, the deputy Treasury secretary. “We accomplished that.”

Some members of Congress who have backed the bill still say that it is not as restrictive as they would like, but that a more sweeping bill — one that also hewed to Mr. Volcker’s original conception — wouldn’t make it through the Senate, where the vote is expected to be close.

Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, subscribes to that view. He says that there are stronger measures he would have preferred to see in the bill, including the original version of the Volcker rule, but that political reality dictated otherwise.

“I would give the present bill an A-minus,” Mr. Frank says, “when you consider that six months ago people were saying the Volcker rule had no chance.”

Mr. Frank is quick to point out that Mr. Volcker signed off on the compromises that got the Volcker rule into the bill. Mr. Volcker doesn’t dispute that.

“The thing went from what is best to what could be passed,” he says.

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THE financial bill has been routinely described in the news media and on Capitol Hill as the most far-reaching regulatory overhaul since the Great Depression, which in some aspects it may be. But it certainly falls short of re-establishing some of the strict boundaries that the earlier laws put in place.

In Chicago on Nov. 26, 2008, President-elect Barack Obama announced that Mr. Volcker would lead an Economic Recovery Advisory Board.

Those laws, most notably the Glass-Steagall Act, forbade commercial banks (what are now, for example, Citigroup, JPMorgan Chase and Bank of America) and investment banks (like Goldman Sachs and Morgan Stanley) from mingling plain-vanilla products like savings accounts, mortgages and business loans with the more high-octane, high-risk endeavors of trading.

Such rules managed to keep the banks and the Wall Street investment houses — and the broader economy that depended on them — out of a 2008-style crisis for several decades. But the gradual unwinding of those regulations began in the 1970s as Mr. Volcker rose to prominence, first as president of the Federal Reserve Bank of New York in 1975, and then as Fed chairman.

Mr. Volcker says that most of the deregulation came after he left the Fed. His reluctance to deregulate contributed in part to his departure under pressure from the Reagan administration. His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999.

Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. “It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,” he says of his silence at the time. “But eventually things blew up.”

He also says he failed to anticipate just how wild things would become, post-Glass-Steagall: “Those were the days before credit-default swaps, derivatives, securitization. All of that changed the landscape, and now some adjustment must be made.”

There were other, earlier silences. Starting in the 1970s, ceilings came off the interest rates banks could place on most deposits and loans. A rising inflation rate made the ceilings impractical, and competition from unregulated money market funds was siphoning big chunks of deposits from the banks.

“The lifting of interest-rate ceilings was inevitable,” he says. “I was for doing it more gradually, but it got such a momentum that we moved the limits more abruptly than I wanted to.”

In the wake of those changes, banks were suddenly free to charge more for risky loans, and that encouraged risky lending. The subprime mortgage market grew out of this dynamic, as did the panoply of complex, mortgage-backed securities, credit-default swaps and heart-stopping leverage that finally produced the 2008 crisis.

In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”

THE Volcker rule, in its initial, undiluted form, was an attempt to resurrect the spirit of Glass-Steagall.

The administration initially did not want to separate banks and investment houses, and wanted federal regulation and protections in place for both the Banks of America and the Goldman Sachses of the world. Mr. Volcker disagreed. Let Goldman Sachs and others trade to their hearts’ content, he argued in Congressional testimony last fall, and if they fail they can lose their own money, not get a dime in bailouts from taxpayers, and then be dismantled by the government in an orderly fashion.

Old-fashioned commercial banks that made loans to individuals and businesses were much more essential to the financial system, he argued, and deserved broader federal support than pure Wall Street trading shops.

But in exchange for that support, Mr. Volcker said, commercial banks had to agree to a partial resurrection of Glass-Steagall that corralled their trading activities. His hope is that the trading restrictions will make the nation’s banks embrace the business of commercial and consumer lending more fully and move away from speculative trading.

To encourage that shift, Senator Carl Levin, Democrat of Michigan, and Senator Jeff Merkley, Democrat of Oregon, co-sponsored an amendment to the financial bill that would have incorporated the Volcker rule with all of its original restrictions. Mr. Volcker even had a hand in writing the amendment, so much so that Senator Merkley suggested, only half-jokingly, that it should be called the Merkley-Levin-Volcker amendment.

The White House, after resisting, signed on to the proposal, and so did Congress after much internal wrangling — but the legislation now contains what Mr. Volcker considers an annoying and potentially dangerous loophole.

Instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3 percent of their capital in such funds, so long as the fund is “walled off” from the bank in a separate subsidiary.

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Banks won’t be allowed to leverage their investments by lending to a hedge fund; such a loan, if sizable enough, could endanger the bank if the hedge fund should fail. In addition, if regulators discover that a bank is overexposed to a given fund, they are required to intervene and, in some cases, may even be able to shut down the fund or restrict its activities, in order to preserve a bank’s well-being.

But the lending restriction is not as clear-cut as it should be, cautions Senator Merkley. “We have to get some clarification on that,” he says.

Nor is it clear that a bank wouldn’t try to come to the aid of a hedge fund or a private equity firm in danger of failing if that failure would also cause financial or reputational problems for the bank.

For all of that, Henry Kaufman, a Wall Street economist and a contemporary of Mr. Volcker, wonders how effectively regulators will enforce any of the bill’s numerous mandates. “The legislation is a Rube Goldberg contraption,” he says, “and there are very long timelines before the Volcker rule is fully implemented.”

Whatever warts exist in the Volcker rule, its author says that other positive elements of the larger bill are still worthy and important.

“Don’t take the Volcker rule out of perspective,” he says. “It is one aspect of a broad reform, and it became a big issue because the administration initially disagreed.”

MR. VOLCKER has had a lukewarm relationship with the Obama White House, where the approach to the economy and financial regulation has been dominated by Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, director of the National Economic Council.

Both men were at the center of the deregulatory whirlwind that swept across Wall Street and Washington over the last decade or so, and analysts have considered them to be friendlier to Wall Street and less inclined to pursue tougher regulations than Mr. Volcker would be.

Mr. Volcker supported Mr. Obama in the 2008 presidential election, and the new president named him to lead his Economic Recovery Advisory Board, a group of distinguished outsiders with little real impact on White House policy — until Mr. Volcker publicly proposed the ban on proprietary trading by commercial banks.

After the proposal gained support outside Washington, the president embraced it and dubbed it the Volcker rule. That gave Mr. Volcker more access to the White House and the Treasury on regulatory policy, but people who work with him say that the White House doesn’t regularly seek his input on other issues.

However complicated his relationship with Washington, Mr. Volcker says his personal life has taken a turn for the better. He had been a widower since 1998, until six months ago when he married Anke Dening, his longtime administrator, executive secretary, adviser and constant companion. Ms. Dening, who is German-born and speaks several languages, travels regularly with her husband and often serves as his interpreter.

When it comes to interpreting the financial legislation, Mr. Volcker says he remains less than impressed. “We have to have a regulatory system that reflects today’s problems and tomorrow’s potential problems,” he says. “This bill attempts to do that. Does it do it perfectly? Obviously it does not go as far as I felt it should go.”

It Begins: Confiscation of Private Funds by Government Desperate for Cash

Katie Pavlich News Editor, Townhall

Mar 18, 2013 01:10 PM EST

The small country of Cyprus is giving the world a grave reality check today by reminding everyone that government money is simply the people's money redistributed as the European Union prepares to seize private bank account savings in order to bailout years of bad economic decisions.

The surprise decision by euro zone leaders to part-fund a bailout of Cyprus by taxing bank deposits sent shockwaves through financial markets on Monday, with shares and the bonds of struggling euro zone governments tumbling.

The bloc struck a deal on Saturday to hand Cyprus rescue loans worth 10 billion euros ($13 billion), but defied warnings - including from the European Central Bank - and imposed a levy that would see those with cash in the island's banks lose between 6.75 and 9.9 percent of their money.

The initial response of investors was unambiguous. Shares lurched lower, the euro fell to a new three-month low, while safe-haven assets such as gold and German government bonds jumped.

The cost of insuring the debt of even high-quality European banks against default also rose sharply with analysts citing fears the decision could spark contagion across peripheral regions with the potential for widespread outflows of deposits.

"If I were a saver, certainly in Spain or maybe Italy, I think I'd be looking askance at these measures and think this could yet happen to me," Peter Dixon, global financial economist at Commerzbank said.

Cyprus is an incredibly small country. It's smaller by area than Hawaii and has the same GDP as the state of Vermont yet, it's having a massive impact on the markets as individuals make a run on banks and investors pull out their money. Europeans in stronger countries like Germany are asking if this could happen to them and here in the United States, people should be asking the same question.

As a reminder, the United States government has been eying and researching how Americans use their 401k plans for quite some time now. Recently we saw the U.S. Consumer Financial Protection Bureau suggest the government help "manage" retirement plans.

The U.S. Consumer Financial Protection Bureau is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency’s first foray into consumer investments.“That’s one of the things we’ve been exploring and are interested in in terms of whether and what authority we have,” bureau director Richard Cordray said in an interview. He didn’t provide additional details.

The bureau’s core concern is that many Americans, notably those from the retiring Baby Boom generation, may fall prey to financial scams, according to three people briefed on the CFPB’s deliberations who asked not to be named because the matter is still under discussion.

The retirement savings business in the U.S. is dominated by a group of companies that handle record-keeping and management of investments in tax-advantaged vehicles like 401(k) plans and individual retirement accounts. The group includes Fidelity Investments, JPMorgan Chase & Co. (JPM), Charles Schwab Corp. (SCHW) and T. Rowe Price Group Inc. (TROW) Americans held $19.4 trillion in retirement assets as of Sept. 30, 2012, according to the Investment Company Institute, an industry association; about $3.5 trillion of that was in 401(k) plans.

In February, the Washington Times went so far as to ask "is your 401k about to be nationalized?"

The $19.4 trillion sitting in personal retirement accounts like the 401K may be too tempting an apple for a government that is quite broke, both monetarily and morally. The U.S. Consumer Financial Protection Bureau director Richard Cordray recently mentioned these accounts in a recent interview, stating “That’s one of the things we’ve been exploring and are interested in, in terms of whether and what authority we have.”

This agency, created by the 2010 Dodd-Frank-Act, is very concerned about how safe your retirement savings are. They are apparently concerned that retiring baby boomers may become victims of financial scams.

If the government takes control of retirement accounts, it will not be called “nationalization.” There will most likely be an indecipherable document that provides an opt-out option (initially), but why would you want to do that? The US government only wants to ensure the safety of your retirement funds; they did after all create a new bureaucracy for that specific purpose. And what could be a safer investment than US bonds?

In a New York Times opinion piece entitled A Bank Levy in Cyprus, and Why Not to Worry, Andrew Ross Sorkin assured his readers that far from Armageddon the Cyprian banking crisis is unique and therefore nothing to worry about.

Sorkin begins…

While the bailout of Cyprus is a fascinating case study and raises interesting theoretical questions about moral hazard for policy wonks and talking heads, here is the reality: It is largely irrelevant to the global economy. Cyprus is tiny; its economy is smaller than Vermont’s. And the bailout is worth a paltry $13 billion, the equivalent of pocket lint for those in the bailout game. Even the larger issue about bailing out a country by taking money from depositors — which quickly created outrage around the world — seems overblown.

Realizing that “taking money from depositors” is undoubtedly the issue of greater concern to “policy wonks and talking heads,” Sorkin continues…

The worry is that the European Union and I.M.F. have created a dangerous precedent by making depositors share in the pain of the bailout. Historically, the goal of bailouts has been to raise confidence in banks so depositors don’t flee. The approach in Cyprus is at odds with that notion, raising questions about whether future bailouts in countries like Spain and Italy — if they are needed — could affect depositors. The alarmist thinking is that depositors will move their money from troubled banks, creating a death spiral.

Sorkin then dismisses this concern outright…

But, in truth, the smart money knows that the bailout of Cyprus says very little about future actions.

He continues…

Given the brutal history between Russia and so much of Europe — and speculation that so much of the money is ill gotten — it is clear why it would be so politically unpalatable to countries in the euro zone, Germany in particular, to bail out Russian depositors.

But not to worry, says Sorkin, this is a unique event…

There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications.

And “even if the bank levy creates a bank run” in Cyprus, Sorkin concludes, “the contagion would be limited,” presumably because the Cyprian banking system is so tiny.

We here at THE CONTRAIAN TAKE have a different take.

The European Union and I.M.F. may or may not use the bank deposit levy as a means of raising monies in future bailout schemes, but that is not the core issue. The core issue is that the Cyprian banking system, in fact the whole Eurozone banking system was and is an accident waiting to happen. And far from being a unique case it is in fact the general case.

Here’s why…

The Cyprian banking system, like all banking systems today, is a fractional reserve system. In a fractional reserve banking system, banks are permitted under law to create deposit money out of thin air. After establishing a “comfortable” cash reserve, generally through the collection of deposit accounts, fractional reserve banks make loans and/or buy assets, “funding” those loans/asset purchases by creating customer bank deposits and/or writing checks on themselves (the later which are deposited in another bank). Austrian economists call these deposits uncovered money substitutes. Money substitutes because they are redeemable at par, on-demand in currency and thus perfect substitutes for currency in one’s cash holdings. Uncovered because the currency backing them is not there.

The working assumption on the part of the banks is that only a small percentage of depositors will ever redeem their monies at any one time. So this banking model works as long as most depositors keep their money on deposit in the banking system. It blows up when too many of those depositors seek redemption at the same time.

The simple fact is ALL fractional reserve banks are technically insolvent because they cannot possibly keep their promise to redeem all their depositors’ money at the same time. As such, they are always and everywhere susceptible to a bank run. All it takes is a trigger, a loss of confidence in a bank’s ability to redeem its deposits and boom… a run on the banks and with it an implosion of the banking system and the economy it inhabits.

Cyprian depositors are currently lining up at ATM machines to redeem what is rightfully their money. They are doing so because what they thought was money held in safekeeping for them is simply not there. The proximate trigger for these lines was/is the proposed bank levy on deposit accounts. The growing size of those lines are the realization that their money is not there, indeed never was. If the money was there the run would stop.

The broader takeaway here is this… Fractional reserve banks are all technically insolvent so therefore anything that casts doubt on their solvency and by extension their ability to redeem their on-demand deposit obligations is fodder for a bank run.

As for the larger Eurozone banking system, it too is a fractional reserve system. It’s banking model is no different then the Cyprian banking model. And it’s an extremely fragile one at that. This is especially true for the banking systems in the troubled Eurozone periphery, whose banks are loaded up with impaired assets. Because of this, many depositors in these countries are already concerned about the solvency of the banks. The potential for a bank deposit levy hitting the shores of these countries is insult to injury, one more reason for depositors to question the “moneyness” of their deposit accounts. As a result, it is one more thing that puts these banking systems closer to implosion.

There is even more cause for worry, something that makes the Eurozone banks, whether they be Cyprian, Spanish, Italian or even German, more prone to a bank run then say the banks in the US, UK, Japan and heck even in Zimbabwe. The banks that populate these banking systems have in times of depositor stress, and at a moment’s notice, access to a central bank willing, indeed mandated to use its printing press to make good on depositor demands. The Eurozone banks and their depositors have no such lifeline. Those lifelines have been jettisoned to the ECB and the political quagmire that is the European Union.

Perhaps bank depositors in Spain and Italy are mulling this fact right now. Perhaps they are thinking this… Will the ECB’s printing press be there for us? Handicapped as it is by the politics of the European Union, can it be? If the European Union would stoop to something as contentious as a bank deposit levy, even if the ECB’s printing press eventually shows up during the next banking crisis, will it only do so at a discount? What else might be in store for us? Maybe one needs to take evasive action before all this goes down.

Take note, we are not saying the existence of a central bank lifeline via a printing press is something to be desired. Its use may halt a bank run, but at the cost of eventually trashing the value of the currency and indirectly the value of depositor accounts too.

So what’s next?

The Cyprian banking system is a mess and will likely be restructured. Many bank depositors may very well lose some of their money in the process, or, at the very least, be limited in the amount of money they can withdraw from their bank accounts. In the extreme, Cyprus could exit the Eurozone, convert over to a new currency and then Cyprian bank depositors, Cyprian creditors and the Cyprian people en masse will all be trashed when the Cyprian government devalues the new currency.

As for the possibility of any of this causing a wider banking/financial crisis in the Eurozone, replete with bank runs, we are on high alert. In a world of highly-levered fractional reserve banks, neck deep in troubled assets, “funded” by increasingly worried depositors and back-stopped by an ECB lifeline that is anything but instantaneous, we suggest anything could happen. At a minimum, like we saw during the Irish, Greek, Portuguese and Spanish banking scares, we expect to see some depositor migration from the banks of the more economically challenged Eurozone periphery into the Eurozone center and to the US (and into Euro currency too). Of special interest to us will be if that migration is broad based, not largely confined to the larger, internationally mobile depositors (as was the case in prior banking scares). If so, things could get very interesting, very quickly, especially so if the European Union and I.M.F. don’t backtrack on bank deposit levies as a policy tool in future banking bailouts.

One thing is for sure… none of what has transpired is good for the fragile Eurozone banking system and by extension the financial markets and economy.

Cyprus bail-out: savers will be raided to save euro in future crises, says eurozone chiefSavings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe's single currency by propping up failing banks, a senior eurozone official has announced.

By Bruno Waterfield, in Brussels5:11PM GMT 25 Mar 2013

The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales and other assets to eurozone bank accounts in countries such as France, Spain and Italy.

The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, told the FT and Reuters that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said.

"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

"If we want to have a healthy, sound financial sector, the only way is to say, 'Look, there where you take on the risks, you must deal with them, and if you can't deal with them, then you shouldn't have taken them on,'" he said.

"The consequences may be that it's the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take."

The announcement is highly significant as it signals the mothballing of the euro's €700bn bailout fund, the European Stability Mechanism (ESM), which Spain and Ireland wants to be used to recapitalise their troubled banks.

"We should aim at a situation where we will never need to even consider direct recapitalisation," he said.

"If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller."

The eurozone had been planning to roll out the ESM as a "big bazooka" in mid-2014 that could help save banks and prevent financial turmoil in countries such Spain or Italy, a development that has been delayed by German resistance.

Mr Dijesselbloem's comments will alarm countries like Ireland and Spain that had been hoping to access the ESM in order to restructure banks without killing off their financial sector by inflicting huge losses on investors.

"I think the approach needs to be, let's deal with the banks within the banks first, before looking at public money or any other instrument coming from the public side," he said.

"Banks should basically be able to save themselves, or at least restructure or recapitalise themselves as far as possible."

In a note published on Monday following the Cyprus bailout deal, Barclays warned that "the decision to bail in senior bank debt and large depositors will likely have a price impact on equity and credit instruments of those euro area banks that are perceived as the weakest".

Mr Dijsselbloem acknowledged that "there is still nervousness" but claimed that any jitters on financial markets caused by the new approach would be a good thing because it would raise the cost of borrowing for unsound banks, an argument unlikely to win friend in Madrid or Rome.

"If I finance a bank and I know if the bank will get in trouble, I will be hit and I will lose money, I will put a price on that," he said.

"I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector."

Last night, the Dutch finance minister tried to row back from his comments by insisting that "Cyprus is a specific case".

"Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used," he said.

Cypriot President Nicos Anastasiades admitted the eurozone bailout deal he struck in Brussels on Monday was painful but said Cyprus could now make a fresh start after having come a "breath away" from collapse. He also said there would be a criminal investigation into the crisis.

Banks in Cyprus will remain closed until Thursday, the nation's central bank announced. It had said earlier that banks would reopen today after a week-long shutdown, except for Laiki and Bank of Cyprus.

Quietly, behind the scenes, the groundwork is being laid for federal government confiscation of tax-deferred retirement accounts such as IRAs. Slowly, the cat is being let out of the bag.

Last January 18th, in a little noticed interview of Richard Cordray, acting head of the Consumer Financial Protection Bureau, Bloomberg reported "[t]he U.S. Consumer Financial Protection Bureau [CFPB] is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency's first foray into consumer investments." That thought generates some skepticism, as aptly expressed by the Richard Terrell cartoon published by American Thinker.

Days later On January 24th President Obama renominated Cordray as CFPB director even though his recess appointment was not due to expire until the end of 2013.

One day later, in the first significant resistance to President Obama's concentration of presidential power, a three judge panel of the U.S. Court of Appeals in Washington DC unanimously said that Obama's Recess Appointments to the National Labor Relations Board are unconstitutional. Similar litigation testing the Cordray appointment to the CFPB is in the pipeline.

The Consumer Financial Protection Bureau (CFPB) created by the 2,319 page Dodd-Frank legislation is a new and little known bureau with wide-ranging powers. Placed within the Federal Reserve, a corporation privately owned by member banks, the CFPB is insulated from oversight by either the President or Congress, its budget not subject to legislative control. It is not even clear that a new President can replace the CFPB director on taking office.

Unusual legal and political environments have a significant impact on the CFPB. With Cordray's recess appointment in doubt several questions remain unanswered.

1) What will become of the CFPB when Cordray's appointment is found invalid? An indicator comes from the NRLB, which operated unconstitutionally for years without a quorum. In 2007 the Senate threatened no NLRB nominations reported out of committee.

The NLRB continued operating with two members. Then a Supreme Court ruling in June of 2010 invalidated the NLRB decisions for lack of a quorum. Fisher & Phillips give the details about what was done next.

But recovery from the Supreme Court's sting was quick, with Liebman and Schaumber still on the Board and with two new Members confirmed, ... the suddenly full-strength Board simply added a new Member to the "rump panel" of the original decisions and managed to rubber-stamp many of the disputed Orders - at a record-setting pace - with the same result...

This may explain why President Obama renominated Cordray a year early. Once confirmed Cordray can rubber-stamp decisions made while he was unconstitutionally appointed. Otherwise those decisions will be invalidated.

2) What will the CFPB do with your money? The CFPB incursion into individual personal savings, in order to control how you invest your money, isn't a new idea. Current proposals grew from a policy analysis as disclosed by Roger Hedgecock.

On Nov. 20, 2007, Theresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, presented a paper proposing that the feds eliminate the tax deferral for private retirement accounts, confiscate the balance of those accounts, give each worker a $600 annual "contribution," assess a mandatory savings tax on every worker and guarantee a 3 percent rate of return on the newly titled "Guaranteed Retirement Accounts," or GRAs.

How would that be accomplished? The Carolina Journal reported Ghilarducci's 2008 testimony to Nancy Pelosi's House.

Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers' personal retirement accounts "including 401(k)s and IRAs" and convert them to accounts managed by the Social Security Administration.

Your Government universal GRA investment savings account is an annuity managed by Social Security. Hedgecock noted '[m]ake no mistake here: Obama is after your retirement money. The "annuities" will "invest" not in the familiar packages of bond and stock mutual funds but in the Treasury debt!'

By 2010 Bloomberg published an article titled "US Government Takes Two More Steps Toward Nationalization of Private Retirement Account Assets." In that article Patrick Heller observed that, with Democrat control of Congress and the Presidency:

n mid-September 2010 the Departments of Labor and Treasury held hearings on the next step toward achieving Ghilarducci's goals. The stated purpose was to require all private plans to offer retirees an option to elect an annuity. The "behind-the-scenes" purpose for this step was to get people used to the idea that the retirement assets they had accumulated would no longer be part of their estate when they died.

So the Government would get the money, not the estate or family of the people who saved the money during a lifetime of work. That's a one hundred percent death tax on savings. Worse, the most responsible and poorest families will be penalized.

Democrats had a blueprint for diverting people's savings from private investment to government debt. Then in 2010 the Tea Party won the house...

If the financial industry is so predatory, how is it possible that savers keep any money? More importantly, we have all those government agencies, FDIC, FINRA, SEC, Labor Department, Treasury Department, NCUA, Office of Thrift Supervision, FHFA, NCUSIF, Comptroller of the Currency, Office of Foreign Assets Control, Pension Benefit Guaranty Corporation, hundreds of criminal penalties, and state level regulators. Are we admitting the Government is incapable of policing criminal and predatory behavior? Do we have invincible predators plundering the people, or do politicians Cry Wolf?

And about that crisis in the economy. Former Congressman Barney Frank, one of the authors of Dodd-Frank, admitted to Larry Kudlow that Government was to blame for the housing crisis.

Professor Ghilarducci said "humans often lack the foresight, discipline, and investing skills required to sustain a savings plan." Professor Ghilarducci tells us that people are flawed, no argument there.

Her solution, substitute Government decisions for the judgment of the millions of people who actually earned and saved the money. She fails to mention the government bureaucrats wielding the power to compel you to comply are themselves imperfect. Which is preferable, one faulty Government solution or millions of individual free choices?

4) Are there other forces pushing Government to confiscate people's savings? With $16 trillion in debt the short answer is yes. When governments embark on a path of spending money they don't have, they resort to financial repression. According to Wikipedia:

Financial repression is any of the measures that governments employ to channel funds to themselves, that, in a deregulated market, would go elsewhere. Financial repression can be particularly effective at liquidating debt.

Do we have any evidence that the US Government is pursuing financial repression? Yes we do. Jeff Cox at CNBC. "US and European regulators are essentially forcing banks to buy up their own government's debt-a move that could end up making the debt crisis even worse, a Citigroup analysis says."

An Investors Business Daily article, Banks Pressured to Buy Government Debts, notes that "anks can't say no. They fear the political fallout. So they meekly submit to the government's dictates."

Meanwhile the Wall Street Journal reports that "n 2011, the Fed purchased a stunning 61% of Treasury issuance." Then a CNS News article revealed that "o far this calendar year [2013], the Federal Reserve has bought up more U.S. government debt than the U.S. Treasury has issued."

5) Is the health of Social Security (SS) a factor? There are several potential measures of when Social Security retirement goes broke. One measure is when FICA tax income doesn't cover the cost of retirement checks. We have passed that point already. Others say that SS is fine until the lock box runs out of special issue bonds (IOUs).

Even though the SS bonds in the lock box cannot be sold on the open market, the Treasury Department remains under political pressure to honor that obligation by borrowing real cash to redeem the IOUs. At least until the IOUs in the lock box are gone. How long is that? Based on a credible source, Bruce Krasting at Zerohedge suggests not long.

SS consists of two different pieces. The Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). Both entities have their own Trust Funds (TF). OASI has a big TF that will, in theory, allow for SS retirement benefits to be paid for another 15+ years. On the other hand, the DI fund will run completely dry during the 1stQ of 2016.

So Krasting expects the President and Congress will soon be forced to choose between 4 solutions:

1 Increase Income Taxes

2 Increase Payroll Taxes

3 Cut disability benefits by 30%

4 Kick the can down the road and raid the retirement fund to pay for disability shortfalls.

Krasting predicts Congress and Obama will be behind door number four. His credible source is the Congressional Budget Office report Social Security Trust Fund--February 2013 Baseline. In the footnotes it projects a $1 Trillion drain on the retirement fund which currently holds $2.8 Trillion. That's a loss of approximately one third of the retirement IOUs.

Krasting however omits another possible solution, politicians can raid private retirement savings to put more IOUs in the lock boxes and more real money in the Treasury. Other people's money is a temptation and $19.4 Trillion is a very large temptation.

Social Security is the largest entitlement program with a trust fund of $2.8 Trillion IOUs, soon to be reduced by another $1 Trillion. Can any politician, addicted to spending, resist that temptation of $19.4 Trillion? That's real people's real money that will be spent by Government in exchange for IOUs given to the SS lock box.

Meanwhile newly minted Senator Elizabeth Warren has entered the debate. Conservatives and Republicans have challenged the CFPB in the wake of the unconstitutional recess appointment. Bloomberg speculates that Warren might agree to trim the CFPB powers in a compromise. Bloomberg reported:

"A strong independent consumer agency is good for families and lenders that follow the rules and good for the economy as a whole," Warren said yesterday in an interview. "I will keep fighting for that." [snip]

Some observers have suggested that Warren's original support for a commission-led bureau might mean she would be amenable to compromise on that issue. Warren spokesman Dan Geldon said such speculation is mistaken.

"Senator Warren thinks the single director structure makes sense and that CFPB should continue to be able to operate, like every other banking regulator, without relying on appropriations for its funding," Geldon said.

Bloomberg also notes that soon "the Senate will have to decide whether to vote to confirm director Richard Cordray in his post, which would make a legal challenge pointless."

Conservatives and Republicans challenge the surrender of legislative power to the bureau, the concentrated power of a single director, the unconstitutional recess appointments, and the violation of constitutional separation of powers. The Republican position is the constitutional questions and litigation presently underway should be resolved prior to approving a director of CFPB.

The constitutional issues surrounding Dodd -- Frank and the CFPB are beyond the space for this article. For those interested in the legal issues, a good synopsis can be found at the Mark Levin Radio Show podcast for February 18th. Mark is an attorney and his Landmark Legal Foundation has argued many cases before the Supreme Court. He can explain complex legal issues in straightforward language.

The Fed Has Already Imposed A "Cyprus Tax" On U.S. Savers Written by Lance Roberts | Thursday, March 21, 2013

Over the course of the last few days I have been swamped with media calls to discuss the "deposit tax" on Cyprus account holders and the potential impact on global financial markets and, more importantly, the possibility of such an event occurring domestically. (See recent Fox Business Interview) So far, Cyprus has not been able to pass such a direct tax against depositors and has gone to Russia for a helping hand. However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion.

While I find it doubtful, but not totally improbable, that a direct deposit tax would be instituted by domestic banks - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers." As we have discussed in the past individuals are not "investors" but rather "savers." Therefore, in planning for retirement, of which there is a very finite and generally short time frame within which to achieve that objective, individuals must not only have a return ON their principal, to maintain purchasing power parity of those saved dollars, but also the return OF their principal so that it may be reinvested to generate further returns. One without the other, as has been see witnessed first hand over the last decade, is a losing proposition in the achievement of those retirement goals. As my friend Doug Short recently showed in his amazing commentary on working age demographics - the age group that should be seeing declines in employment, 65 and older, are actually showing increases. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals.